Megabanks killed Incubator

Lender to small firms made risky bets once top banks recovered

Incubator Bank of Japan collapsed Friday after informing the government its liabilities exceeded assets by ¥180.4 billion, forcing the Financial Services Agency to implement the government deposit guarantee cap for the first time since 1971.

Why did the new bank fail and why are experts playing down its impact on the financial system? Here are some questions and answers:

Is Incubator Bank different from other banks?

Incubator Bank is based in Tokyo and neighboring prefectures in the Kanto region. It specializes in lending mainly to small and midsize companies using money that customers have invested in time deposits. It does not offer saving accounts.

The bank doesn’t deal with savings accounts because they require too much manpower and computer system investment to deal with the various transactions, including salary remittance and utility payments. This allows it to offer higher returns on time deposits than rival banks.

What is the bank’s history?

Incubator Bank opened in April 2004. Its founders include Takeshi Kimura, who was a key adviser to then Financial Services Minister Heizo Takenaka. Kimura also played a key role in drawing up the FSA’s bank inspection manuals and getting banks to ditch their bad loans after the bubble economy imploded.

In August 2003, Kimura announced a plan to start a new bank and opened Incubator Bank just eight months later, taking advantage of financial reforms under Takenaka that included accelerating the government approval process for new banks.

Kimura became the president in January 2005 and the chairman in June the same year.

Why did it go bankrupt?

Incubator Bank suffered from a lack of knowhow, especially when it came to managing risk associated with small-business loans. It also was hit by a number of scandals.

The bank originally wanted to specialize in making small loans to small and midsize firms. But after the major banks eventually got around to writing off their mountains of nonperforming loans, they resumed lending to small companies, encroaching on Incubator Bank’s business.

Incubator Bank responded by making bigger loans and purchasing credit from other lenders, but this tactic only increased its bad loans and eventually forced it to file for bankruptcy.

In March 2009, it was revealed that SFCG Co., a high-interest nonbank moneylender, sold loans to Incubator Bank that had already been sold to other banks or companies. The scandal eventually forced SFCG to file for bankruptcy protection.

In July this year, then Chairman Kimura, then President Tatsuya Nishino and other Incubator Bank executives were arrested on suspicion of deleting about 280 e-mail messages from the bank’s computer servers to impede the FSA’s investigation. They were indicted in August.

The bank was profitable from 2006 to 2009, but loan writeoffs forced it to log a ¥5.1 billion loss for the year to March 2010.

What is the “payoff” deposit protection rule?

Until recently, the government was obliged to protect all bank accounts against bankruptcy for their full value.

After the banking industry finally recovered from its costly bad-loan crisis in the late ’90s, the government scrapped its blanket guarantee in 2005 and replaced it with the “payoff” rule, which limits deposit protection to ¥10 million, protecting taxpayers.

Media reports say the FSA decided to apply the payoff rule because Incubator Bank does not offer saving accounts, which means few depositors will be inconvenienced.

Also, Incubator Bank does not conduct much lending and borrowing with other banks, and thus does not pose a threat of destabilizing the financial system.

According to the FSA, 113,000 people had deposited ¥585.9 billion as of the end of August, and 3,560 of them had invested more than ¥10 million for a combined ¥47.1 billion in time deposits.